BofA forecasts Chile rate cuts amid low inflation and soft activity

Bank of America projects Chile's central bank will begin interest rate cuts this month, citing low inflation, lower oil prices, and soft economic activity, alongside reduced Middle East conflict risk. BofA forecasts three 25 basis point cuts through Q1 2026, bringing the terminal rate to 4.25%, with two cuts expected by year-end. This easing comes amidst increased economic policy uncertainty following Communist Party candidate Daniel Jara's primary win, with the anticipated rate cuts potentially influencing the economic landscape ahead of Chile's November elections.

Analysis

Bank of America forecasts that Chile's central bank will commence a cycle of monetary easing this month, citing a confluence of factors including low inflation, reduced oil prices, and soft domestic economic activity. The path for easing is further cleared by the de-escalation of Middle East tensions, which the central bank had previously flagged as a primary risk. The forecast outlines a specific path of three 25 basis point cuts through the first quarter of 2026, targeting a terminal policy rate of 4.25%, with two of these cuts anticipated in the second half of 2024. This dovish monetary outlook is contrasted by a significant increase in political risk. The primary election victory of Communist Party candidate Daniel Jara has elevated economic policy uncertainty ahead of the November presidential and congressional elections, creating a complex investment landscape where monetary stimulus may coincide with political volatility.

Key Decisions for Investors

• Given the forecast for imminent and sustained rate cuts, investors should evaluate opportunities in Chilean local currency fixed income, as bond prices are positioned to appreciate as yields fall.
• The anticipated monetary easing cycle is likely to exert downward pressure on the Chilean Peso; therefore, it is prudent to review and potentially hedge currency exposure on CLP-denominated assets.
• Investors should closely monitor political developments leading up to the November elections, as the noted increase in economic policy uncertainty could introduce significant volatility and potentially offset the stimulative effects of rate cuts on Chilean equities.